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March 27, 2013

Advisors Optimistic, Not Using Policy Statements: Russell Outlook

There’s good news and bad news to report in Russell’s latest quarterly outlook for advisors.

The survey finds renewed optimism in 2013. Looking out over the next three years, 72% of advisors said they were optimistic about the capital markets, and 21% said clients shared that view. It’s an improvement over last quarter, when 65% of advisors were optimistic and 16% indicated clients were optimistic as well. Advisors also indicated that those in and approaching retirement tend to be more pessimistic, and younger generations are generally more optimistic.

Given the current economic and political environment, Russell put investor behavior “under the microscope.” It sought to know if—and how—advisors use investment policy statements (or a written statement of risk and return objectives along with implementation guidance). If they do, are clients staying the course? Or are clients more apt to deviate from policy?

Given the ongoing industry trend of moving to advisory-based relationships, the company said it was surprised that only 39% of advisors surveyed were using investment policy statements with all their clients. However, respondents said they used investment policies as conversation starters, helping clients focus on their investment goals.

“We think that’s a great start, but you may benefit even more by taking it a step further,” the report reads. “An investment policy statement is a powerful commitment device in down markets—or during especially volatile and uncertain times.”

It also noted that baby boomers and the Silent Generation (age 66 and older) are not necessarily feeling encouraged these days, even as many equity markets set new highs.

“This could mean older investors won’t have enough equity exposure to earn the returns needed to sustain their current lifestyle. For example, many retirees like the perceived safety and reliability of income from bonds. But with 10-year Treasury rates hovering around 2% right now, it would require an enormous nest egg to generate the same income stream they might have achieved when rates were higher.”

Lastly, the survey asked advisors about sequestration, and whether or not it’s “the new fiscal cliff.”

As the budget sequestration approached during the survey period, advisors said clients wanted to talk about government policy (63%) more than any other topic. That 63% number approached the high mark of 68% for government policy concerns set in August 2011 during the debt ceiling debate, according to Russell.

However, for now, at least, advisors said the current political discord about sequestration has largely been discounted by the markets.

“Hopefully, clients can move past the government policy conversations and focus on something they actually can control—like their current spending and saving choices and their decision to follow a deliberate investment policy,” the survey concluded.